Liberty Economics

Laissez-Faire News & Commentary

Category: Economics

Senator Dean Heller’s swing and a miss

Pursuant to a recent news article in the Las Vegas Sun, Senator Heller faults speculators on Wall Street – the in vogue practice – for rising oil prices, and consequently rising fuel prices. Heller’s remarks can be interpreted in one of two different ways. He’s scapegoating speculators for rising prices. Or he’s implying the subsidized speculator – speculators who have been beneficiaries of bailouts, objectively allowing risk-free trading and speculating. If it’s the latter, I fail to see how anybody could disagree. Do you want people getting bailed out with your money for bad decisions? But this transcends futures traders. Homebuyers made bad choices when they longed homes at pseudo prices with borrowed money. For the record, I sounded the alarm at that time. Meanwhile, the prudent savers were being priced out of the market.

I believe I know a thing or two about the futures market. I believe I also know a thing or two about economics. I’ve never gone into debt to buy a house nor a car, save a Mustang that I paid off over a decade ago. I stood on principle and refused to take anything from the taxpayer to go to school, while living well below the poverty line. Far from being rewarded, I’ve been penalized since only college graduates have the cognition to qualify for jobs that I don’t (e.g. as a legislative aide for economic policy).

Pursuant to conventional wisdom, I’m a speculator, rather than a hedger. It’s very misplaced to stigmatize speculators. Objectively, speculators are hedgers. Pursuant to prevailing orthodoxy, the distinction between the two is that a hedger enters the futures market to mitigate risk from assets already held, while the speculator is assuming new risk by entering the futures market. But it’s not that simple.

Suppose there’s a farmer who grows corn. For sake of illustration, he anticipates a crop size of 5000 bushels of corn. He wants to lock in the price of corn at, say, 615 cents per bushel (the present July 2012 contract price, which I’m long at 609 on the mini). He then takes a short position in the futures market that will offset his position in the cash, or spot, market.

When I went through my Series 3 course, I detected a flaw with prevailing orthodoxy when it comes to hedging. Prevailing orthodoxy says that farmer need not mind his business when placing futures trades. The futures trade is no different than wearing a life vest when out at sea. Since the short position in the futures market offsets that “risky” long position in the cash (i.e. spot) market, his position in the futures market is said to be a hedge. There’s a problem with that calculus. In an inflationary paradigm (i.e. the real world), the farmer’s true hedge is not his futures position, but his cash market position.

Saying that the farmer’s losses in the futures market will be offset by gains in the cash market is merely a different way of saying that his gains in the cash market will be offset by losses in the futures market. By taking a losing position in the futures market, the farmer…lost. To argue for indiscretion in the futures market is altogether chimerical. Rather than plagiarizing myself, I would refer the reader to a piece I wrote back in 2009: http://libertyeconomics.com/barrick-gold-corporation-lifts-hedge-gold-hits-1200/ Just to make clear, there are long hedge trades as well.

Now let’s consider the “evil” speculator. The speculator who trades, say, corn futures, but does not grow corn. Guys like me. I’m not wealthy. I’m far from wealthy. Due to horrible healthcare at the VA, where I was considered to be delusional for believing things like hypothyroidism is symptomatic, that couldn’t have possibly contributed towards landing a meaningful job. After all, I’m totally “delusional”. I could go blow all my money on partying and travel and booze and be broke, but I would rather not, although pursuant to prevailing orthodoxy that would stimulate the economy since the problem with the economy is savers. I would rather better myself so that I can help not only myself, but others. So how do I better myself without taking anything from the taxpayer? I’m compelled to do things like speculate, which everybody does in every transaction. The pizza shop owner is speculating that people will feed themselves with the pizza he’s selling.

I have dollars – not alot, but some. I’m long cash. Everywhere I look, I see prices rising. How do I keep up with rising prices if I don’t generate a return that equals or surpasses the rate of inflation? By choosing to trade, say, corn futures, I’m hedging myself against dollar destruction, which is the present policy of Washington. If I stay long cash, I will be a certain loser since the value of the dollar will continue to go down as long as people blame speculators. Eventually, I will be compelled to use up what little savings I have on living expenses.

All “liquidity” has to go somewhere. By being in the futures market, I’m not driving up prices in the spot market. Would Senator Heller rather I go out and buy physical bullion? Or stockpile cans of corn? Furthermore, speculators don’t just take long positions. There are speculative short positions. Is a short position just as dirty and sinful as a long position? What if I wanted to short corn at the market bid, thus helping drive down the price of corn?

In a futures trade, like every other transaction, every long position requires a short position. Every short position requires a long position. There can’t be a buyer without a seller nor a seller without a buyer. There can’t be hedgers without speculators. If speculators are removed from the futures market, this will necessarily remove hedgers. Which prompts the question: If hedgers are saints, how can speculators be sinners? Furthermore, for the speculator, every long position eventually becomes a short and every short position eventually becomes a long, since the speculator offsets the position.

It isn’t speculators that create inflation. Inflation is central bank policy. We can’t debase the currency, suppress interest rates, combat deflation, say that spending and consumption stimulate the economy, preach about the virtues of conservation, preach about the “twin evils” of both inflation and deflation, demand higher prices of just some things (e.g. equities and homes, making them unaffordable), inflate even more to subsidize low income and affordable housing because people can’t afford higher priced homes, but then blame “sinful” speculators on Wall Street because prices are rising. Hell no, Heller.

There’s something fundamentally wrong when present policy has been crafted to prevent housing prices from falling, while simultaneously blaming speculators for rising oil prices. Scapegoating speculators for rising prices is not only wrong, it justifies faux solutions that engender greater problems.

If Heller really cared about rising fuel prices, he would be preaching about the need for monetary tightening. Priced in real money (i.e. gold) fuel prices have fallen. Fuel prices have gone up only when priced in dollars, not gold. Heller needs to tell us what he means when he blames speculators for rising oil prices. Does he mean that speculating in the futures market causes rising prices? Or does he mean creating inflation to subsidize politically-connected speculators causes rising prices? Until he explains this one, I’m saying it’s time to draft Kim Kardashian for a senatorial race in Nevada.

My proposal for economic restoration

“The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing consequences of that not merely for one group, but for all groups.” -Henry Hazlitt

A SPECIFIC PLAN – THE ONLY PLAN – TO ENGENDER AN ECONOMIC RECOVERY WITHOUT HYPERINFLATING

Former Federal Reserve Chairman Paul Volcker, whom I have much respect for, pointed out that a 2% inflation rate means confiscating half of one generation’s wealth. In the end, he settled with price stability for the Fed’s mission. Far better than inflation targeting.

Federal Reserve Vice Chairman Donald Kohn promised that the Fed would turn off inflation if it happens (is the guy myopic, since it’s here already?). Ben Bernanke was talking about “green shoots” many months ago. Politicians were talking about a “glimmering of hope.” The Fed tells us it will stay loose until there’s an economic recovery, as though artificially low interest rates are therapeutic in nature. The parlance used engenders confusion, and it’s my purpose here to deconstruct a few fallacies.

Let’s start with this axiom: prevailing economic orthodoxy is wrong. If prevailing economic orthodoxy is so great, then how did the orthodox practitioners get us into this mess? Even I saw this one coming. See: http://libertyeconomics.com/be-afraid-of-the-dollar-not-gold/

What is it that we are all pursuing and seeking? The betterment of our lives (i.e. economic growth). When government officials and politicians speak of economic growth, they should be able to define the phrase. If they can’t define it, then they have no business talking about economic growth. So what is economic growth?

Wealth is that which satisfies demands. Inasmuch as businesses satisfy consumer demands, they are being productive. Within the construct of the unhampered market, productivity can be measured by income, since income is earned by satisfying consumer demands. The government, on the other hand, does not sustain itself by satisfying consumer demands (i.e. earning its income). The government uses the threat of violence, or actual violence, to obtain its revenue (i.e. compulsory taxation). Thus the government can’t get away with saying that the more it taxes and spends the more productive it’s becoming.

The technocrats had to invent a different excuse for government: its spending is productive! So government spending – as well as private sector spending – has been placed into the GDP. The kleptocracy tries to camouflage itself with Keynesian formulas (e.g. the “multiplier effect”).

Nevermind the fact that if the “multiplier effect” held truth, so long as nobody saved anything – meaning zero-liquidity preference, in which case we would have hyperinflation – the “multiplier” would be infinity!

If you look at the textbook definitions of economic growth, objectively, it’s defined as a rising GDP. A rising GDP means we are having “economic growth,” because the GDP supposedly measures “economic growth,” and “economic growth” is defined as a rising GDP. Do you see any tautology here whatsoever? Even I noticed the tautology all on my own without anybody to point it out to me in any book. This is “Mark original” analysis.

Before economic growth can possibly be measured, it must be defined. Defining economic growth as a rise in the very indicator that supposedly measures economic growth is self-evidently flawed. Look at it another way. Measuring wealth in terms of a depreciating currency is akin to changing around the definitions of inches and feet in order to say that a person is changing in size. If the technocrats and politicians in Washington can’t figure this one out, then everything is hopeless.

The simplest definition of economic growth is a lessening of the unsatisfaction of wants or demands. We are diverse, and our wants, or demands, are subjective. Politicians and econometricians are not psychics. There is no way to quantitatively measure economic growth. Even Alan Greenspan wrote a piece – even while maintaining the fiction that the Fed is blameless – in which he claimed the Fed is blameless because it’s impossible to model malinvestment. See: http://us.ft.com/ftgateway/superpage.ft?news_id=fto031620081437534087 If it’s impossible to model malinvestment, then it’s impossible to model economic growth.

Prevailing economic orthodoxy tells us that there are two kinds of GDP growth: nominal and real. This is where thinking on the subject becomes dubious at best. Real GDP growth is defined as nominal GDP growth discounted for inflation, which is determined by the unreliable GDP deflator (I won’t belabor the reasons why in this piece, but I have done so before and will do so again).

Let’s start with what should be a self-evident absolute: economic growth need not be discounted for inflation. Either we are having economic growth, or we aren’t. If the GDP must be discounted for an inflation component, then this means that some GDP growth is good, but other GDP growth is bad. But if the GDP is measuring the same thing(s) constantly, this makes little sense. Either the GDP measures economic growth and any rise in the GDP is good, or the GDP measures inflation and any rise in the GDP is bad. If the GDP can rise, but only in nominal terms, then this must mean that it can fall, but only in nominal terms.

When Fed officials and other D.C. technocrats speak of “economic growth,” they’re talking about rising prices in absolute terms, which is not inflation but the result of inflation (i.e. monetary expansion). If a person conflates rising prices with economic growth, they’re boxed into an awfully awkward position. The only way to have a fast economic recovery would be to have prices rise fast (i.e. hyperinflation).

Real economic growth engenders falling prices. Falling prices increases the ROR (rate of return) in real terms. I remember when I was growing up during the 1980s, and if I wanted to make a photocopy, I had to walk down to the drug store to use the big, bulky copy machine. If I had to send a fax, I went to Kinko’s, or another commercial location. At that time, nobody would have thought that the average household might have its very own fax/copy machine. Today, you can get an all-in-one for under $100. Who would have thought a century ago we would go from horses and buggies to automobiles?

Undoubtedly, this is a positive development. Albeit demand for the copy machine at Kinko’s and horses and buggies has dropped. But those things have been replaced by at-home copy machines and automobiles. This drop-off in demand for Kinko’s and horses and buggies would be detected by the GDP as economic decline. The political response would be to bailout Kinko’s and the horses and buggies industry, as though market share is supposed to remain static. One man’s loss of market share is another man’s gain of market share.

Conversely, if the western part of the United States went to war against the eastern part of the United States, the GDP could rise exponentially. But would that be a positive development for the economy? Hardly.

For the Fed to keep the price level the same in nominal terms requires inflation (i.e. an expansion of the money supply). Thus, even if prices were to remain stagnant, we can still be suffering from the effects of lost deflation. The question is: what would prices otherwise be absent central bank manipulation? We don’t know, but it’s safe to say prices would be a lot lower.

It’s the effort to prop up prices through stimulus that’s preventing the economic recovery. People are losing their homes because homes are unaffordable (not because they are too cheap). Thus deflation is the cure (not the problem). What sense does it make to provide somebody with a cheaper mortgage – by interest rate manipulation through loose monetary policy at the FOMC – on a more expensive house that costs more to maintain? But that is what present policy is aimed at pursuing. What sense does it make to stimulate more home building when housing isn’t clearing the market as is?

No matter which way the government inserts itself into the housing market, this diminishes the need for sellers to set prices pursuant to supply vs. demand (i.e. market-clearing prices). Whether the government buys up bad mortgages, bails out the homeowner or the bank, this interferes with the price mechanism.  If we continue down the current policy path, one will have to be politically connected to get an “education,” get a job, get healthcare, and…get a house!

Suppose there’s a shop owner whose inventory is piling up because nobody can afford to pay for his prices. What does the shop owner have to do? Lower prices. But suppose the government inserts itself into the picture and subsidizes the shop owner. No longer is the shop owner’s sustenance dependent upon having to satisfy consumer demands, thus diminishing the need to set market-clearing prices. Within the construct of the unhampered free market there can’t be price gouging any more than there can be wage gouging, since vendors can’t short inventory at prices above what consumers are both willing and able to pay.

Let’s try another scenario. Suppose the government distributed “credits” or “vouchers” to this shop owner’s customers. This would be perceived as an “enlightened” form of welfare for the shop owner’s customers. However, this is yet a different way to subsidize the shop owner, by letting the shop owner sell at artificially high prices. A move like this prices the poorer, non-recipients of “credits” or “vouchers” out of the marketplace. No surprise that education and healthcare – two of the most government subsidized cartels – have also had the highest levels of price inflation. This begets the erroneous perception that the problem is a dollar shortage for the one who didn’t receive “stimulus.”

The mistaken conclusion is that we need these subsidies and stimulus rather than understanding that it’s the subsidies and stimulus pricing the little guy out of the marketplace. The poor person has been priced out of the marketplace. The problem isn’t a dollar shortage, but a dollar leakage thanks to promiscuous spending.

I’ve always said that, by rights, the impoverished belong to the free market movement. With the government as large as it is today, would it not be a fair assumption that many people who are poor are so precisely due to big government, whereas many people who are wealthy are so precisely due to big government? You see, big business uses big government to manipulate the marketplace on its behalf.

The flawed assumption made by some progressives is that big government is somehow less dangerous than big business. This begets the erroneous conclusion that the problem is an absence of regulation. It’s paramount to understand that we can’t regulate away insolvency. We can’t regulate away past mistakes. But we sure can regulate everybody except the big cartels out of existence.

Furthermore, it’s loose monetary policy that engenders speculation, as lenders/investors are compelled to hedge against a depreciating currency. Holding (i.e. investing in) dollars guarantees losses. Politicians have no right debasing the currency to then regulate away that behavior. The simple solution is to stop the printing press. Politicians have no right to punish us for their past transgressions through cumbersome regulations. The most efficient way to mitigate excessive risk taking is by letting the market set interest rates pursuant to the true supply of savings. Subsidizing risk taking while privatizing the profits is not a real free market. Size-capping should not be conflated with risk-capping.

Ludwig von Mises and Eugen von Bohm-Bawerk saliently articulated how labor can’t increase its share at the expense of capital. Nobody can argue against capital without arguing for a reduction in their own standard of living. Thus the problem for the progressive should not be with capital per se, but that capital is so inaccessible to the common person.

Why is capital so inaccessible to the common person? Every tax, every regulation, every government program drives up the cost of capital. Politicians love this, because they get power. Big business loves this, because it creates barriers to competition. Big government creates monopolies, as a monopoly is a state of imperfect competition, and imperfect competition is begotten by government interference in the marketplace.

The situation with housing is no different than that of the shop owner I described above. In a market unhampered by government, sellers are sustained by selling inventory. When the government inserts itself into the picture, sellers are no longer dependent upon having to satisfy consumer demands by selling inventory. Sustenance is disconnected from the satisfaction of consumer demands. In the case of housing, the government and the Fed are subsidizing the loan market to hold back inventory. See: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/08/MNL516UG90.DTL&type=realestate

Simultaneously people are living in tents. The mission of politicians in Washington is literally to keep people homeless. Do not let those kleptocrats masquerade as philanthropists. It’s not their money they’re spending; it’s your money they’re spending – and on themselves. So long as the government keeps trying to prop up prices, as it has done with healthcare and education, real estate won’t clear the market and we won’t have a recovery.

Economic recovery rests upon a smooth-functioning price mechanism, where the market can discover real prices. How is Ben Bernanke or anybody else supposed to know what prices of everything are supposed to be? Would politicians mind telling me what housing prices are supposed to be? How is it good to stimulate home building when there are homes on the market not clearing?

The pursuit of price stability means the Fed will constantly be chasing its own tail. The Fed doesn’t want to allow deflation, so it deliberately tries to create inflation. But then the Fed also promises to intervene if inflation surpasses some level that central planners supposedly have the wisdom to know is wrong. This makes no sense. It’s impossible for the Fed to fight both deflation and inflation. If inflation is good, then bring it on Zimbabwe-style. If inflation is bad, and must be turned off after it starts, then why start the inflation to begin with? In other words: central planners have promised to do an intervention on their own intervention.

If prices fall, this isn’t a bad thing. If we had propped up the economy of, say, 1900, we would still be riding around in horses and buggies. While Paul Volcker is right that expanding the money supply by 2% every year wipes out at least half of one generation’s wealth, the Fed should not be pursuing price stability. We should, instead, be concerned with monetary stability.

Inflation is not economic growth. Just as inflation begets a negative RRR (i.e. real rate of return), deflation begets a positive RRR. Falling prices means rising real incomes. No nation has ever succeeded in substituting a printing press for income-generating investment.

Our only ticket out of this mess is to stop the printing press, which will bring false economic activity to an end, allowing for what remains of the productive and profitable elements of the economy to lead us into an economic recovery. The government is leading us over a cliff. There can’t be a systemic collapse without a systemic cause. Until systemic changes are made to Washington (not the private sector), there will be no economic recovery.

DEBUNKING MYTHS & OFFERING THE SOLUTION

Myth: The problem is “toxic” assets (e.g. mortgage-backed securities) which have created systemic risk

When a hospital can’t collect payment, the hospital sells this debt to a collection agency. This doesn’t create booms and busts. The risk is asystemic unless the government bails out every debtor and/or creditor.

Myth: Present problems were caused by bad lending (i.e. sub-prime loans)

Promiscuous lending is a symptom – not a cause – of economic conditions. Take bad lending to its own logical conclusion: creditors give away money as an act of charity, getting nothing in return. Does charity cause booms and busts? No. Promiscuous lending is a symptom of loose monetary policy at the Fed, which tricks the loan market into consummating unjustifiable loans.

It’s primarily through FOMC operations that interest rates are determined (until the Fed loses control, which will eventually happen). By expanding the money supply, this increases the supply of loanable funds without an expansion of genuine savings. In doing so, the loan market appears to be more solvent than it truly is, tricking the loan market into consummating unjustifiable loans. This artificially suppresses nominal interest rates below their natural level (i.e. where they should be pursuant to the true supply of savings). By expanding the money supply, this allows debtors/borrowers to pay lenders/creditors with devalued dollars, thus lowering the real rate of interest.

A credit transaction involves trading present goods for future goods. If there are no present goods (i.e. savings, which aren’t created on a printing press), then credit has to be curtailed. The problem isn’t a credit crunch, but a savings crunch. Investment can only come out of savings because producers must consume in order to sustain the process of production. In order for the baker to make more bread, the baker himself must eat. Thus somebody must forego present consumption in order to fund credit expansion.

The rate of interest is the discount rate of future goods as against present goods. An example would be what an investor pays for a printing press. Suppose the printing press will generate five-hundred thousand dollars in net income throughout a ten-year life. The entrepreneur will certaintly not bid up the price of the capital equipment to five-hundred thousand dollars. The entrepreneur is willing to invest, say, fifty-thousand dollars for the printing press and the vendor is willing to part ways with the printing press in exchange for an immediate fifty-thousand dollars. The entrepreneur and capital equipment vendor mutually settle upon fifty-thousand dollars – a sum far less than the five-hundred thousand dollars – in exchange for the printing press.

How much present income (i.e. present goods) is an entrepreneur willing to invest in order to garner five-hundred thousand dollars in future net income (i.e. future goods) over a ten year period? Reflected in the transaction is the rate of interest as determined by time preferences. Interest rates represent an agio on present goods since present goods are more valuable than are future goods. A person would rather eat an apple today than eat an apple ten years from now. Interest rates must be set pursuant to the true supply of savings and are determined by time preferences. If everybody wants to consume without saving, then interest rates must rise to reflect time preferences.

There is no right way to extend credit at negative real rates, which is a negative rate of return in real terms. It’s a calculus for the loan market to go bust. Any person, firm, or institution (e.g. government) that’s dependent upon inflationary credit expansion is, by definition, insolvent (i.e. a non-income generator). Failure has to be an option for bad business decisions. That’s the check on excessive risk taking.

Capital naturally gravitates to lower priced, higher-yielding economies. It’s called arbitrage. Artificially low interest rates engenders capital outflow. Capital goes racing overseas. The problem isn’t a dollar shortage, but a dollar leakage. The dollars are out there; they’re just piled up in foreign reserves. The way to repatriate these dollars is for the Fed to tighten, interest rates rise, prices collapse to reflect wages, which will then beget capital inflow thus lowering the natural rate of interest. If I give you $10 in exchange for a book and you turn around and give me that $10 in exchange for a DVD, the real means of purchase for the book was the DVD and the real means of purchase for the DVD was the book. Increasing the quantity of dollars creates no benefit for the economy.

Myth: The FDIC is good for depositors

The FDIC offers deposit insurance for bank customers, which is really a backdoor way to bailout insolvent banks. Could you imagine being able to run a ponzi scheme (e.g. fractional-reserve banking), knowing that when your insolvency is exposed the government will pay off your customers (i.e. a de facto bailout of you)? This creates yet another layer of moral hazard on top of the central bank injecting “liquidity” into the loan market. Thus FDIC’s true purpose is designed to keep the unsustainable intact.

Needing to insure bank deposits should raise questions in and of itself. Unlike natural disasters, economic risk can’t be pooled. It’s one thing to guarantee one’s solvency should they get wiped out due to, say, a flood. It’s quite another thing to guarantee solvency, per se. It’s impossible to insure against economic miscalculation and loss. If I were to go into business and you offered to insure me against business failure, you become the true entrepreneur in the deal by underwriting/assuming risk.

The FDIC (insolvent) is backed by the Treasury (insolvent) which is backed by the Federal Reserve (insolvent). The Federal Reserve is backed by a printing press which is backed by the savings of Americans. Not only is the concept of insuring economic risk altogether chimerical, but there’s a reason why only a government-backed entity would offer insurance to banks. Inflationary credit expansion makes banks inherently insolvent. Demand deposits are payable on demand, while banks are lent long. Thus the time structure of assets and liabilities does not match.

At the end of the day, the FDIC/Treasury/Federal Reserve – all three of which are insolvent – can guarantee depositors pull money out of their bank, but there’s no guarantee of the currency’s value. By guaranteeing solvency, this inherently places the currency’s value at risk. Deposits are guaranteed in nominal terms, but not in real terms.

When one scrutinizes the role of the FDIC more closely, they can see that its entire purpose is keeping the good ole’ boy network intact, leaving Americans with nothing. If the free market were allowed to function, the government’s role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank’s creditors – i.e. its depositors – would become receiver for the failed bank’s assets. Depositors should be senior to all other creditors. Thus, in the event of a bank run, depositors have the first legal claim to a bank’s housing inventory.

What does the insolvent FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank’s assets from its depositors by becoming receiver for a failed bank’s assets. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies.

So we can see this sleight-of-hand trick – under the guise of protecting depositors – is designed to transfer real assets (i.e. housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Ben Bernanke’s “liquidity.”

There’s no way the FDIC/Fed can guarantee the solvency of the banking system or depositors, which will destroy the currency (measure purchasing power in terms of gold) thus destroying the very depositors (anybody holding dollars) those institutions are supposedly designed to protect.

The solution, then, is to put a failed bank’s assets into the receivership of its depositors. Any other efforts to prop up the housing and/or bond market will prevent the market from clearing and block those who have already lost homes from ever regaining possession. We are now doing to the housing market the same thing that has already been done to healthcare and education.

If you want to figure out how to get your homes back, then make an inquiry into where they’ve gone. The Fed is sitting on at least $1 trillion worth of Mortgage Backed Securities. We can go a long ways towards saving the dollar and getting people back into homes by having the Fed liquidate the MBS on its balance sheet.

In my estimation, any other plan will engender homeless people and peopleless homes.

My problem with Brian Sandoval, Mike Montandon, and Governor Jim Gibbons

My intention in this piece isn’t to make the constitutional case against Arizona’s immigration law – i.e., appeal to authority. Suppose the law is constitutional, the statute still fails to pass my morality test. Instead, I make the moral case against the immigration law.

The events that took place on 9/11 have been used as a battering ram against the civil liberties of Americans. Since that horrific event, the federal government has implemented CAPPS II and the “No-Fly List.” What is the “No-Fly List” for? Supposedly to prevent terrorists from boarding flights. This is a perfect absurdity. Why would terrorist suspects be told they can’t fly? Wouldn’t – and shouldn’t – a terrorist suspect be apprehended? Apprehending a terrorist suspect would also suspend the right to freely travel, which means it isn’t necessary to suspend particular freedoms without due process of law.

It is self-evident that the “No-Fly List” was never aimed at terrorists. Indeed, politicians, political activists, and tax delinquents have all ended up on the list. Objectively, their right to freely travel has been suspended contra legem. Travel restrictions are the hallmark of totalitarian governments. Does anybody remember the Berlin Wall?

Now, in the name of stopping the “brown peril,” right wingers agitate for deporting Mexicans and building fences. In light of the travel restrictions already in place, it would be a legitimate concern that a border fence and heightened border security can be used to trap people in – a far more dangerous prospect than living amongst individuals who don’t carry their federal papers.

The populist indictment of immigration is that immigrants “drive down wages.” Not true. This argument dovetails with arguments in favor of minimum wage law. The welfare-warfare state drives down wages. The problem is not the immigration, but the welfare state. Furthermore, let’s take this argument to its logical conclusion: capital controls.

The government could inflict injury upon every employer of Mexican immigrants (legal or illegal). However, this would do absolutely nothing to create or save a job. If employing inexpensive labor at home is curtailed, this begets one of two possibilities: the job is destroyed altogether, or the employer flees the country altogether.

What next? Criminalize capital flight? Pursuant to the statutory case against hiring illegal immigrants, the de jure case for capital controls is already in place. If it’s illegal to hire an illegal immigrant at home, then why is it legal to do business with “undocumented” workers abroad? (In that case, one becomes the de facto employer of foreigners living abroad.) For the sake of logical consistency, outsourcing should be criminalized. All international trade and commerce should be criminalized. Let me remind you that if the government can trap capital in, it can trap people in.

How would I approach this issue? Let property rights prevail. If two people wish to engage in peaceful, voluntary and mutually beneficial exchange, whose right is it to interfere? That somebody is an “illegal alien” is a faux concept constructed by statutory law. Unlike politicians and bureaucrats, most Mexican immigrants hold real jobs. (Maybe we should deport politicians and bureaucrats instead.) I will never again travel through Arizona until that law is repealed.

Recently, I was down in Puerto Vallarta. It’s a beautiful place and Mexicans are some of the most wonderful people on the planet. When Americans travel to Mexico, they see themselves as – and are treated as – tourists. When Mexicans come to the United States, Americans see them as invaders. I plan on moving to Puerto Vallarta. Don’t forget that there are plenty of American expats living in Mexico. Just wait until the Mexican government goes tit for tat and decides to expel American expats. And what would Americans say if Mexicans decided to do just that to the gringo? Maybe I’ll take that idea to…”my Congressman in Puerto Vallarta” (I say that jestingly). Let’s send all them silly Americans back to…Arizona.

Puerto Vallarta is peaceful. The crime is along the border. Why? The drug war, which empowers drug cartels by fueling demand for cross-border transportation. Last time I checked, there are no problems with cigarette smugglers at the border. End the drug war and you end the violence.

Barrick Gold Corporation lifts hedge, gold hits $1200

Gold hit $1200 an ounce as Barrick Gold Corporation, a mining company, has lifted its short “hedge” in its entirety. As one who has held the NFA Series 3 license, which I voluntarily withdrew so that I could return to trading futures personally, I detected huge problems with prevailing hedging theory. I did very well on my Series 3 exam (obtained my Series 3 license) because I knew what the answers are supposed to be, but the prevailing theory on futures hedging is wrong.

Pursuant to prevailing hedging theory, one is to take a position in the futures market that is opposite to the cash (i.e., spot) market. Thus if somebody is long 100 ounces of gold in the cash market (i.e., owns 100 physical ounces of gold), then one would take a short position in the futures market. This is considered to be a short “hedge.” The argument in favor of such a short “hedge” is that losses in the futures market will be offset by gains in the cash (i.e., spot) market.

There is one big problem with this analysis. This analysis takes for granted that somebody even has an inventory to begin with. Furthermore, if your losses in the futures market are being offset by gains in the cash market, this is a different way of stating that gains in your cash market position are being offset by losses in your futures position. In an inflationary paradigm, firms will have a difficult time replacing inventory if they are merely breaking even in nominal terms.

As I thought this through carefully, I realized that the futures industry abuses the word hedge. As one can see in an inflationary scenario with a short “hedge,” the true hedge is not the futures position, but the inventory.

As one who has held the Series 3 license, it is my humble opinion that the futures market should be looked at as less of a hedging vehicle than merely an efficient way to buy and sell without having to make or take delivery. The real hedge in the gold/silver futures market is the physical inventory. Of course, nothing moves up or down in a straight line. Rather than sticking with a short “hedge,” bullion producers just may want to take time to exercise more discretion when plotting entry and exit points – viz., buy low and sell high. The dollar is on its way down thanks to central bank policy, and Barrick Gold did good to lift its short “hedge.”

Vote buying monopoly

First, let me preface my remarks by noting that my intention is not to advocate any particular position so much as it is to highlight paradoxical election laws.

The prevailing script against verifiable voting says that paper trails lead to “vote buying” schemes. My protest to that answer goes beyond a healthy skepticism of electronic voting.

Candidates are bound by a plurality of election statutes, including disclosure laws. If you make a financial campaign contribution to any member of your Congressional delegation, that information will be put out for public consumption. But what good is a financial campaign contribution unless it can be used to collect votes? Which brings us to the following self-evident absolute: voting is nothing other than the ultimate campaign contribution.

The preceding truth prompts me to ask: if we should have a secret ballot, then why not secret financial contributions? After all, the distinction between a contribution at the polls and in monetary form is merely an arbitrary legal one.

I suppose the refrain to my question might run as follows: well, see, politicians can be “bought,” so we need to err on the side of transparency for financial contributions. But that only prompts me to ask this question: then why not err on the side of transparency for contributions at the ballot box (i.e. voting contributions) as well?

In fact, not only do politicians sell their votes in “vote buying” schemes for campaign contributions, but routinely I see politicians promising taxpayer funded favors in exchange for votes. Pursuant to the argument against verifiable voting, I guess the way to curtail that would be to have Congressmen and state legislators cast secret ballots on legislation. Anybody wish to propose that idea?

Also, anything short of absolute and complete disclosure for voting makes it inherently impossible to know whether or not the aggregate vote count is accurate.

If we are going to take the argument against verifiable voting to its own logical conclusion, not only should legislators cast secret ballots, but, come to think of it, most campaigning I see should be outlawed as well.

Let me explain. If you voluntarily choose to exchange your own property (i.e. money) with somebody in order for them to vote for a certain candidate, no matter how just the cause, that would be called “vote buying.” However, candidates running for office can promise largesse from the public treasury (i.e. other people’s property) in exchange for votes, and that is perfectly legal. What is the real objective difference, other than the latter inflicts far more injury since it is robbery?

What about government workers, government contractors, and paid campaign staffers? Could their votes possibly be motivated and influenced by financial incentives? I guess if you sell your vote to a common man, whose interest may even be just, that is bad, but selling your vote to politicians is fine.

In essence, politicians have a legalized vote buying monopoly. Unfortunately, we will never know what people are voting themselves subsidies (i.e. selling their vote), since voting is done by a secret ballot. The politicians better get a handle on this ASAP!

Be afraid of the dollar, not gold

I have been working to educate people about the dangers of inflation and the crisis that is looming on the horizon for the past six years. The pathological origin of this precarious economic situation we are in has never been an enigma for me. My on-radio New Year’s prediction for the year 2002 was that the price of gold would go up, and people better get some to protect themselves against inflation, i.e., the devaluation of the dollar. I was laughed at by the host of the program that I made my prediction on, since, as the attorney-host said, the danger we were facing was “deflation.”

At the time I made that prediction, the price of gold was about $270 an ounce, which was near the price gold had been stagnating at for quite some time. The year 2002 was exactly when the price of gold started to rise exponentially. Do I have special access to information that others don’t have? No. My forecast was based on nothing but a sound understanding of economics.

How did I see this coming? I owe a special debt of gratitude to Murray Rothbard, who still teaches from beyond the grave. It was about the year 2000 when I first read one of the late Professor’s books: What has Government Done to Our Money? That was my epiphany. Not only did the lights go on for me, but I was impressed with the saliency of Rothbard’s writing. No platitudes, no sterility, and no obfuscation. Every word was indispensable to the construct of substantive thoughts that were easy to understand. It is lies – not the truth – that must be camouflaged with pseudo-intellectual hieroglyphics.

By the time I got done reading my first Rothbard book, I was able to sum up America’s economic problems with one word: inflation. Reading my first Rothbard book impelled me to read more and more of his books, as well as reading other Austrian School economists. After reading Murray Rothbard, Ludwig von Mises, and Henry Hazlitt throughout the year 2000, I had a very good understanding of why the sudden revelation of a cluster-of-errors, known as a recession, occurs: inflation.

I will do my best to explain how inflation (i.e., an expansion of the money supply, which the politicians and their central bank are responsible for) causes recessions as briefly as possible.

As goods and services are exchanged for devalued dollars, profits are over-estimated. This is due to orthodox accounting practices, and the way people are trained to measure transactions in strictly nominal terms. I call it two-dimensional thinking. The seller exchanges his goods or services for these devalued dollars, earning, say, a seven-percent return in nominal terms. The problem comes when the seller has to replace capital, or re-stock inventory, when the seller discovers that there was a failure to account for inflation, i.e., the devaluation of the dollar. That seven-percent return in nominal terms turns out to be less – perhaps even a negative rate of return – in real terms, because prices are higher. Inflation causes people to over-estimate profits. Without even realizing, people are using up original, and even more than original, capital. What looked profitable wasn’t profitable, forcing a contraction.

Before the revelation phase known as the recession, the over-estimation of profits causes even more mal-investment in those sectors that appear to be profitable, but really aren’t.

That which is unproductive is unprofitable, and would not last for very long in the unhampered free market. The biggest beneficiary of inflation is the inflator itself, i.e., government. Just look at how huge the government is, and it isn’t just unproductive, but counter-productive. This should lay to rest any doubt about how inflation nurtures mal-investment.

The inevitable consequence of, and economic catharsis for, mal-investment is liquidation, i.e., a true correction. Unfortunately, the mainstream economics profession is lax in this understanding. It is normal that certain prices should drop due to mal-investment. This is where mainstream economics turns logic upside down. Instead of realizing that the inflation before the collapse of certain industries is the cause, mainstream economics uses econometrics to examine piles of data. The data itself becomes synonymous with the recession, as though nothing in the past precipitated present circumstances. The recession caused itself. From this thought pattern, it then follows that to adjust those “markers” of the recession is to provide the cure. If certain industries are collapsing and prices are falling, the government must inflate even faster, argue mainstream economists. It is akin to pushing the mercury in a thermometer down to cure a fever.

Having been armed by brilliant Austrian School economists with an arsenal of knowledge, I could see the fallacy in using inflation to cure the recession; I could see that the government’s “recession response team” at the Federal Reserve would cause more inflation and calamity. The government and its central bank would do everything in its power to combat “deflation.”

Power is an intoxicant, and the regime running the United States is well past inebriated. I have no reason to believe this current cabal of promiscuous spenders will end the orgy any time soon. As dependable as the idea that bears sleep in the woods is, prices will go up as long as politicians keep devaluing the dollar to finance their spending orgy. That is axiomatic. We have had chronic inflation for almost a century. There is no mystery about this, yet so few seem to understand. The real scary thing is that many politicians and their followers believe the way to mitigate the impact from rising prices is to inflate even more, like there is a dollar shortage.

People have been inundated with phrases like “housing bubble.” Let me say this: there is no housing bubble; there is no gold bubble; there is a dollar bubble. I don’t see the dollar bubble getting “popped” short of hyper-inflation.

If the 1980 price of gold is adjusted for the expansion of the money supply (i.e., inflation) up to the present time, today’s price of gold would have to reach over $2,000 per ounce. Relatively, I believe the price of gold is still very cheap. The United States has started to exhaust its ability to finance cheap imports with inflated dollars. I believe the price of gold is just starting to come back into parity with reality with the upward surge. Ignore the financial press. Every time the price of gold drops more than a dollar, the reactionary financial press starts ringing alarm bells. No sooner does the price of gold go up by another twenty dollars. It is never too late to protect yourself by purchasing precious metals, but the earlier the better. You will lose by holding onto dollars that are losing purchasing power. Be afraid of the dollar, not gold.

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